This blog has been created to pen down my thoughts on value-based investment opportunities (or the lack of them) in Indian listed companies. As an enthusiastic reader and life-long student of Behavioural Finance, i also plan to blog on various aspects of investment psychology.

Thursday, September 2, 2010

Where will the 'market' go now?

Answer: No-one knows!

Well, sorry! If you thought this was a post which will give you details as to where the market (index) will go from the present level, you are going to be disappointed. Because, I honestly do not know. (No-one does!)

The reason for writing on this topic is as under:
Me and some investor friends were recently having a discussion on this topic, as to 'market kahaa jayega'. Some poeple presented logical and valid arguments, along with supporting data, as to why the index should fall. Others presented a counter-view which was equally logical and supported with data. This got me thinking and the result is that you people have to read another post of mine!

Where will the index go next? Well, each person will have his own view and logic on this topic, depending upon one factor; how much is that person invested!

For those who are heavily invested and are sitting on little cash: This camp will always say that the market will go up. Reason? Well, its because they are already invested to a great extent. People belonging to this camp will read up on and pay most attention to all positive factors, macro and micro. (This happens sub-consciously and not deliberately.) They will gather and collect data which supports their argument that the market has to go up. They will sub-consciously disregard or give little importance to negative facts or find justifications against them. They will always reach a conclusion that the market has to go up. And the sad part is, they think that they have done this 'logically', without any bias.

For those who are on huge cash and are not heavily invested: This camp will obviously say that the market has to go down. (That is why they are on cash, right?!) The people belonging to this camp will do the exact opposite of the people belonging to the first camp. They will gather information and data which shows an extremely grim and negative picture which is conclusive 'proof', supporting their hypothesis. Again, the sad part is that they will sincerely think that they have arrived at the most logical conclusion. They too will sub-consciously ignore all the positive factors and fixate upon the negative ones.

So what can we learn from this?

Our mind is extremely well designed to JUSTIFY. By hook or crook, the mind will find out reasons to justify an action. In the present case, the action is of being invested, or being on cash. In any case, the mind will work in a way to accurately find out reasons to justify this action.

Ideally, these reasons should be found first, then the action should follow. However, here, it will inevitably happen that the reasons follow the action. Is there anyone who is fully invested, willing to say that the 'market' has to fall?? Nooo! That person will obviously say that the market will rise! It happens all the time.

So, what should be done about this? The answer is pretty simple; DON'T TRY TO GUESS WHERE THE MARKET IS GOING! It is a waste of time and energy. We invest in individual stocks. So doesn't it make sense to concentrate our attention and energy on those stocks and companies, instead of trying to time the market?

Stocks should be bought and sold on their own merit, irrespective of the market conditions. Personally, I think that is the best way of doing things!

I agree that saying all this is much more simple than actually doing it! Not many will have the courage to buy, when everyone around is saying 'the market will fall'. Very few can do it. But then, very few earn extra-ordinary returns in the market, right?

Hi Neeraj, Wonderful post and very good advice, i try hard to avoid predicting market movements and buy whenever i find value. Another common bias related to this(i don't know what it is called) is when even in individual stocks, if we own a stock or like a stock , we tend to give more weightage to data which is bullish rather than to the negative points. This is hard to overcome i guess but it helps to not get emotionally attached or fall in love with a stock.

That leaves technical analysis way out of the picture according to your thoughts... :)... If stocks were bought and sold according to their merit, our market would be highly efficient. But the reality is highly different. Biggest question - How can we regularly invest with maximum efficiency in our decision making?

Hi Yash,Yes, i do not take any decisions based on technical analysis."If stocks were bought and sold according to their merit, our market would be highly efficient." i do not agree with this statement. Stocks are not bought/sold on their merit..they r bought/sold on the investors' perception of what their merit is..a lot of times, this general perception goes for wild swings. If we, as investors perceive things rationally and logically, the efficiency increases automatically. Being stock specific is the way to go..cant generalise the process for you...hope it helps..Cheers!Neeraj

Yes Anoop,Typically, 'unique' companies which have no listed peer get extra-ordinary valuations..I have not studied Career Point, but i think this totally fits in the category. Other like Talwalkar's, Jubilant Foods, SKS, etc have recvd similar response on listing..(it goes without saying that one needs to be ultra careful and control greed, while investing in such cases, at such valuations)Cheers!Neeraj

Yaaa i think we had discussed it much before this IPO...the question to be asked is, do these valuations make sense? if not, its always better to give it a miss..i myslf am not at all into Career Point..cheers!Neeraj

Hello sir,The blog written by you gave us new vision for investing, Thank you.But don't you feel so at many point of time there exists trend of either bullish of bearish which generally ruined the small investor.Its like hunter of stock market in the hands of big players.Even if the company is very good according to fundamental analysis but no volatility in stock, so what should be the strategy for the common investor like us?

Hi Ishan,In my view, this is a misplaced notion, that 'big players' control the mkt and 'small players' are at their mercy..small players (retail investors) suffer losses only due to themselves. They try really senseless stuff like trying to time the market, falling prey to greed and fear and leaving common sense aside while investing.A stock should be bought/sold on its merits. If you have bought a gud company at gud valuations, u r bound to make money. No question of whether big guys move it or anythn..cheers!Neeraj